Country Risk and Dollar Soar as Brazil Becomes More Risky Economy

RIO DE JANEIRO, BRAZIL – Brazil has become a riskier country for foreign investment in recent weeks, moving away from other emerging countries. If the economic crisis triggered by the novel coronavirus pandemic is true for everyone, the political turmoil, much more intense here, has raised concerns over the economic rebound and Brazil’s fiscal accounts.

As a result, the country risk has increased much more in Brazil than in other regions, and the Brazilian Real is the currency depreciating the most against the US dollar among the main emerging economies. With the trend for real interest rates to become negative here in the coming months, the assessment of strategists and economists is that Brazil will be further distanced from the radar of major investors.

One of the measures behind the worsened perception of Brazil’s risk profile is the recent behavior of the indicator that measures the chance of a country defaulting on its foreign debt, the Credit Default Swap (CDS). This year alone, Brazil’s CDS increased 255 percent.

As a comparison, in Latin America, Mexico’s CDS rose by 175 percent and Chile’s by 14 percent over the same period. Among emerging regions, South Africa’s increased 137 percent, Turkey’s by 112 percent and South Korea’s by 55 percent. Argentina and Venezuela are excluded from this list, as they are already in a state of default.

In terms of foreign exchange, the dollar has already increased more than 47 percent in Brazil this year, while in Mexico it has increased 29 percent, in Turkey 17 percent and in South Africa 32 percent.

Before the Covid-19 crisis and the deteriorating political scenario, investors viewed Brazil as having a chance to return to investment grade rating, the seal of “good payer” granted by risk assessment agencies, as shown by the CDS rates in early January, which operated at 95 points (its lowest level in ten years).

In April, the rates sometimes exceeded 400 points, the same level Brazil had in early 2016, just before Dilma Rousseff’s impeachment. On Wednesday, May 13th, the CDS was traded at 355 points, up 25 points in just one day, according to the IHS Markit quotes.

“We are increasingly pessimistic about the prospects for Brazil,” says Andres Abadia, senior economist in London for Latin America of Pantheon Macroeconomics consultancy.

“This is the worst time for a political crisis in Brazil,” says Commerzbank’s currency analyst You-Na Park-Heger. The country should face a severe recession because of the shock caused by the pandemic.

New record

And amid the turmoil, the dollar hit a new nominal record on Wednesday, May 13th. The US currency closed the day quoted at R$5.90. The daily high was 0.55 percent. In the month, the dollar has already accumulated a high of 8.5 percent, and 47.09 percent in the year to date.